Win: drive:\zimbra\zdesktop\log if you started out on an earlier version, or the %USERPROFILE% enviromental variable on later versions.
Vista drive:\Users\username\AppData(hidden folder)\Local\Zimbra\zdesktop\log
XP drive:\Documents and Settings\username\Application Data\Zimbra\zdesktop\log

So from the log file it looks like send failed because yahoo is requiring captcha. This can happen from time to time, and I will add a fix so that this error gets reported propertly in the UI. In the meantime, if you just log into your yahoo account with your web browser this should clear the error.

Hmm, we will have to ask the Yahoo mail team about this. Are you sure you logged into the same Yahoo mail account with your browser? A browser login should clear the captcha error as long as you are logging in from the same IP address.